NEGOTIATE AN OVERAGE FAIR TO BOTH PARTIES
If you’re selling land that you think the buyer might profitably develop for more than was bargained, overage is one way to secure future development value.
DO YOU NEED ADVICE?
Sometimes, sellers add overage more in hope than expectation, which just complicates the deal.
The overage agreement specifies that as part of the sale, the original owner is entitled to a part of any future financial increase in the value of property or land.
Assuming the overage is realistic, there are lots of issues to sort out. For example:
- When is the clawback actually paid?
- Is it when planning permission is granted?
- Or is it when the property is built, or when it is sold?
These are also with consideration of the prospect of further development after overage has been paid.
We can help you negotiate an overage agreement that is fair to both parties and reflects the true value of land. In many cases, the estate agent will leave these issues to your lawyer to explore whether any agreement is possible.
For the overage agreement to be effective, the correct legal framework will need to be put in place. This will ensure that the party making the arrangement is protected.
An Option Agreement is used when a potential buyer of a particular piece of land/property wants to ensure that it is not sold whilst they are trying to obtain planning permission.
Option agreements are often sought by developers over land and can go hand in hand with leases. For example, if the landlord agrees tenants can rent business premises with the option to buy the landlord’s interest if they choose.
In either scenario, the property is sterilised so far as other interested parties are concerned, and options should not be given lightly.
There are 4 different types of option agreements:
- Call Option – this is where the buyer had the right, but no obligation, to buy the property/land.
- Put Option – where the seller has the right, but no obligation to sell the property/land buyer.
- Cross Option – the buyer receivers a Call option and the seller gains a Put option in return.
- Reverse Option – Occasionally these are used to secure an overage payment. The seller receives the option to purchase the property/land back after the ‘trigger event’ occurs, if the overage payment is not forthcoming. The re-sale price will reflect the increase in value of the land/property back after the trigger event.
In other deals, potential buyers are given the right of first refusal. For example, a landlord granting a tenant the option to buy before anyone else. This can be a powerful incentive for the tenant to sign the lease, but it can be frustrating for the landlord.
Then there is the option price. Will you set it now, or agree an affordable formula for determining it when the times come?
Option agreements might sound simple at first glance, but they can become complicated when you get into the detail.
For help with these and all the other issues around overage and option agreements, get in touch with our commercial property solicitors.
WE CAN HELP YOU NEGOTIATE AN OVERAGE AGREEMENT THAT’S FAIR TO BOTH PARTIES AND REFLECTS THE TRUE VALUE OF THE LAND
DO YOU NEED ADVICE?
Promoters come in all shapes and sizes; some are more involved in the land developments value which they are incentivised to maximise. Occasionally there is the option to purchase at the end if the open market is cool.
These contracts are often not dissimilar in practice options. They are commitments to buy a block of land. This is only if the condition is precedent such as winning planning permission being obtained. There is however, much to arrange, for instance:
- How long will it take to get planning permission and for what?
- If the permission granted falls short of expectations, does the buyer still have to go ahead?
YOUR OVERAGE & OPTION AGREEMENTS | TAYLOR ROSE TTKW EXPERTS
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